Commentary: Handset standoff with China Mobile spurs spat

After an exposé on the state broadcaster CCTV, came an editorial from the state mouthpiece the People’s Daily branding it greedy and incomparably arrogant. The latest salvo came in the form of directive for Apple
AAPL, -1.45%
to face “strengthened supervision” from China’s consumer watchdogs.

But why exactly has the world’s most popular consumer-products company sent the government of the world’s most populous country into such a tiff?

Reuters

A store in Beijing advertizing Apple products

The level of protest seems out of proportion to what is officially just a disagreement over warranty policies.

On the face of it, Apple investors should be worried. Its share price is in retreat, and it needs good-news catalysts rather than making powerful enemies in its second-largest market.

And falling out with Chinese authorities can prove costly — just ask Google
GOOG, -3.28%
It was forced into a painful retreat from the Chinese market in 2010 after a tussle with regulators. Local search rival Baidu
BIDU, -1.83%
has hardly looked back since.

Given this form, there is inevitable speculation authorities have another agenda: They are seeking to damage or weaken Apple to pave the way for local mobile-handset makers.

But blocking servers or censoring content is one thing — it looks beyond even the long arm of China’s government to push Apple’s evangelical customers into the arms of a local handset maker.

However, there is another party that could benefit from Apple being taken down a peg or two. Enter China Mobile
0941, +0.55%CHL, -0.06%
, the world’s largest wireless operator, with 710 million subscribers. These two giants have been reportedly locking horns for some months as they seek to agree to terms for Apple to provide next generation iPhones.

It is likely there are a few wireless operators around the world that might nod in agreement that Apple is arrogant and hard to deal with — at least privately. But that’s what happens when you have a product everyone wants. You need the iPhone to be in the game.

And that even applies to China Mobile, with two-thirds of China’s billion-strong wireless market. This gives the wireless Goliath a strong hand, but arguably it is still trumped by Apple.

China Mobile needs Apple, not just so it can broaden its phone line-up but also to lift the pace of customer upgrades to 3G and 4G networks.

Here China Mobile has a particular technology challenge.

For more than a decade China has been developing its own 3G technology standard, known as TD-SCDMA. The government has invested huge amounts of money as well as political capital in its success. Against its wishes at the time, China Mobile was called in for a form of national service to commercialize this homegrown technology.

But while authorities can tell operators what technology standards to use, they can’t yet tell Chinese consumers what handsets to buy.

So far, China Mobile has made heavy weather of getting its subscribers to upgrade to 3G. Latest figures for February showed China Mobile had reached 100 million 3G customers after three years. Its much smaller rival China Unicom
0762, +0.72%CHU, +0.48%
had 83.5 million subscribers, and is upgrading subscribers at a much faster pace.

China Unicom benefits from having a distribution deal with Apple and running the widely established 3G standard WCDMA.

China Mobile needs to quicken the pace of upgrades, especially as this year, it starts paying for a 4G build-out. At its recent results, China Mobile guided its capex would leap close to 50% to 190 billion yuan ($30.6 billion) as it rolls out its TD LTE standard this year.

While Apple’s latest iPhone 5 would need to be custom-built to support TD-SCDMA’s frequencies, the stumbling block is believed to be commercial terms rather than technology. There has been speculation China Mobile will get the first 5S iPhone model and possibly a cheaper version next year.

But as time drags on, it would be understandable if China Mobile and its state shareholders are getting frustrated.

Delay too long, and it could start losing customers keen to use the latest iPhone versions. China Mobile already has over 15 million customers using the iPhone on its 2G network

For Apple, China Mobile would obviously be a good partner. But at the same time, China is already its second-largest and fastest-growing market, even without a deal with the market leader.

The current situation is likely particularly frustrating for Chinese authorities. A key reason for a homegrown 3G project was to guard against being beholden to foreign technology and paying royalties to another American firm, Qualcomm
QCOM, -2.87%
.

Now they have to deal with a U.S. firm reaping the rewards of having intellectual property that everyone needs.

Most likely, this Apple persecution will be short-lived, and China Mobile will ink an iPhone deal with Apple. But like many carriers, they will grumble at the terms.

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